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Business Development & Marketing Cash Flow & Forecasting Finance General

How will consumer spending change as a result of the Coronavirus pandemic?

consumer spendingConsumer spending has become much more restricted during the Covid-19 pandemic safety measures, but will it lead to a permanent change?
From March 21, all non-essential businesses in the UK were forced to close, from hospitality, restaurants and fashion retail to car dealerships and holiday travel companies.
At the same time, many businesses have had to furlough staff and a substantial number of people have sadly lost their jobs altogether.
Inevitably the reduction in income through furlough and loss of jobs and restrictions on going out due to most of us being confined at home are having a huge impact on consumer spending.
It is no surprise, therefore that in March, demand for new cars from private buyers fell by 40.4%, while fleet registrations dropped by 47.4%.
According to Essential Retail the food retailers have clearly benefited both in-store and online to the point where they have had to limit supplies of some products and sign-ups of new online shoppers, however the picture for non-essential retail spending is significantly different, even for those retailers with considerable online and delivery capabilities. Purchases have plummeted.
It says: “People are scared to spend money that’s not essential,”
But as the situation continues, it argues, there is likely to be a greater need for certain non-essential items. Examples include exercise and hobby equipment, gardening products and home improvement materials.
The question is whether all this will lead to a more permanent change in consumer spending once the crisis is over.
According to Paul Martin, UK head of retail at KPMG, Covid-19 will precipitate a rapid increase in e-commerce activity that may persist long after the event, not that this has happened yet.
No-one knows yet how many of the currently closed SMEs will survive the current limitations and much will depend on whether such consumer and business activity will return to normal once the restrictions are lifted. But those of you that do survive will be well-advised to develop an e-commerce proposition if you don’t already have one. The rapid growth in our use of online conference facilities for video meetings that in the past were physical meetings could be an indicator of one change to our normal behaviour where the number of daily meeting participants using Zoom has risen from 10 million to 200 million in a month.
A major factor is the possibility that unemployment rates may rise substantially which will be down to two factors: staff reduction by surviving businesses; and job losses due to insolvency, both of which are likely if there is a delayed or slow return to normal activity.
Another unknown quantity is whether consumers will be more selective about what they purchase having discovered how much they can do without while they have been forced to stay home.
Once the pandemic is over, it is also likely that environmental concerns will rise up the agenda again, making people more wary of re-joining the previous “throw-away” culture.
It will be a while yet before the situation becomes clearer but it is likely that the current crisis will have a significant impact on both the mechanisms and the volume of consumer spending.
 
 
 

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Business Development & Marketing Cash Flow & Forecasting Finance General

Sector focus – changes in consumer spending and attitudes?

consumer spendingIt will be interesting to see the analysis of consumer spending once the Christmas and peak holiday buying season is over.
Data throughout the year has indicated that people are less willing to splash out on so-called “big ticket” items, whether online or on the High Street.
Whether this is being caused by a change in attitudes to consumption or to increasing worries about job security and income is not yet clear. Consumption assumes spending on basic needs and then discretionary spending on goods and services including leisure.
Influences on consumer spending
Clearly, consumers’ confidence in their current and future financial situations are a key driver in the willingness to spend at least in the short term.
It is influenced in part by the changing costs of expenditure on such things as housing, fuel, food, clothing and travel costs, which are monitored annually by the Consumer Price Index (CPI), where the weighted average of prices of a basket of consumer goods and services indicates the level of and changes to the rate of inflation in the economy.
This has left less for discretionary spending.
An indicator of spending on capital goods is this year’s fall in the purchases of new cars, attributed by the Society of Motor Manufacturers and Traders to weak business and consumer confidence, economic uncertainty and confusion over diesel and clean air zones.
There has also been a reduction in consumer spending on both the High Street and online which has contributed to the closures of High Street retailers, and reduced profits of online retailers such as Asos, whose profits were reportedly down 68% in the year up to October, altbough   Asos attributed this to IT problems in its warehouses.
A study by the card machine provider Paymentsense at the start of the year predicted that over half (56%) of UK consumers were planning or considering cutting their spending over the coming year by cutting back on purchases of goods like new clothes (31%), sweets, crisps, cake and chocolate (27%), and switching to less expensive toiletries (18%). This was closely followed by spending less on jewellery and holidays which require a flight (both 17%).
This is not surprising given that research by KPMG and the Recruitment and Employment Confederation (REC) showed that the number of permanent job appointments fell in November as growth in the demand for staff fell to a 10-year low.
Employment in the manufacturing sector also fell for the eighth month in a row and the pace of job losses was the steepest since September 2012 according to the latest IHS Markit/Cips monthly snapshot.
It would be interesting to see how many people (mainly women) have lost their jobs in the ongoing carnage in High Street Retail.
At the same time, the Office for National Statistics (ONS) has reported that average household financial debt had risen 9% to £9,400 in the two years to March 2018. The biennial study showed that personal loans accounted for £35bn of total household debts, £32bn is from student loans, £25bn is hire purchase, and £22bn is on credit cards, while the remainder includes £3bn of overdrafts. Much of this, it has been argued, is due to increased living costs, such as rent, council tax and other bills.
It is fairly certain, therefore, that worries about the future and job insecurity are influencing consumer spending currently.
Having said all this, however, the recent Black Friday sales saw an average 7% increase in sales compared to last year.
This could be seen as a change in consumer spending to waiting to buy until prices are, allegedly, reduced.
It will take more than a year to determine whether a longer-term change in consumer spending habits is taking place, however, there are other factors at play.
Concern for the environment and global warming have risen to the top of the agenda, in particular for younger consumers, which has encouraged people to think twice about buying fast fashion and disposable and other plastic items.
Buying second-hand has been re-branded as “pre-loved chic” and the demand for longer-lasting household products such as fridges, washing machines and the like has prompted the EU to regulate that manufactures must stock spare parts for ten years for such items.
Then there have been the movements encouraging people to buy from local independent retailers as well as the rise of local groups specialising in helping people to repair household items such as small kitchen appliances.
Guy Moreve, CMO of Paymentsense, said “…. our study reveals that instead of aspirational health or lifestyle goals many UK consumers are increasingly concerned about just keeping up as living costs climb more quickly than salaries.
“Another growing trend is ethical consumption, and over 2018 we saw increased awareness and attention to environmentally friendly lifestyle habits such as veganism and sustainable fashion. We feel that this coming year will see continued movement in this area, as more people adopt ethical attitudes.”
Time will tell whether the “shop till you drop” love affair is finally over and there is a sustained change in consumer spending.

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Banks, Lenders & Investors Business Development & Marketing Finance General

August 2018 Key Indicator: is consumer spending undergoing a massive change?

consumer spending - a devastated landscape?The UK economy is generally described as a consumer economy.  This means that its health is significantly dependent on and measured by how households spend or save their income.
The effects of changes in consumer spending behaviour can be dramatic for businesses as my July 2018 Key Indicator on the retail sector demonstrated.
But consumer spending behaviour is not simply directed by a change in habits and tastes.  In this month’s Key Indicator, I look at those factors that affect how much disposable income is available and how this influences spending decisions.
The majority of consumer income is earned as salary or wages from employment.
This may be topped up by benefits, such as the tax credit system for households with children, where family income is low. This was restricted to being payable for the first two children only, following various adjustments to state benefit rules since the 2008 financial crash and the introduction by the Government of various “austerity” measures as part of efforts towards economic recovery.
For the retired, household income generally comes primarily from state and occupational pensions.
Household income may also be topped up by interest and dividends from any savings but recently these have been low, none the least due to the unprecedented low levels of interest rates.

The factors that affect disposable income and therefore consumer spending

There have been several worrying indicators that consumer spending has been sluggish throughout 2018, and this has a significant impact on the health of an economy like the UK’s.
The most recent figures published by the Office for National Statistics (ONS) on household consumption are for the first quarter of the year, from January to March. Although there is always a time lag in publication they are indicative of a longer-term trend.
Consumption remained subdued at 0.2% in Quarter 1 2018 according to the ONS and in 2017 annual growth in household consumption remained at its weakest since 2012. The ONS reports that this is “consistent with the slowdown in output for consumer-focused services industries, which has been on a declining trend since late 2016.”
The factors that are likely to have affected this are the weak growth in real wages, with household incomes squeezed by rising import prices following the past depreciation of £Sterling following the 2016 Referendum vote to leave the EU.
According to the ICAEW (Institute of Chartered Accountants in England and Wales) sluggish wage growth at on average 2% in the face of a near- 3% inflation rate is also a major factor in the squeeze on household incomes.  This is despite unemployment being at its lowest level since the early 1970s and therefore the existence of a skills shortage in some sectors. But it is outweighed by the existence of such things as tax and benefit reforms, the growth of the “gig economy” and zero hours contracts that have changed the employment landscape for both businesses and employees and in turn reduced the reported level of unemployment statistics.
Kamal Ahmed, the BBC’s economics editor says he looks at two statistics when examining people’s finances.  These are firstly whether they are net borrowers or net lenders, and secondly at their savings ratio.
Net borrowers are either borrowing, or spending their savings, to make ends meet.  Net lenders are those “lending” money to the economy in the form of pension contributions, savings and investments”.
The savings ratio is the proportion of people’s disposable income that they save. Here again there are worrying signs in the most recent ONS data. The savings ratio is currently at 4.1%, the third lowest since records began in 1963.
As I reported in my blog on Tuesday (July 31) the most recent statistics from the Insolvency Service, on the second quarter of the year, April to June 2018, also revealed a worrying indicator on individual and household finances. This was that numbers of individual insolvencies had reached their highest level since the first quarter of 2012 and had increased by 4.4% compared with January to March 2018. Again, this has been an upward trend for several months.
According to the ONS British Households spent on average £900 per year more than they received in income in 2017 and there are signs that people are increasing their borrowing. There are three main sources for personal lending which are all growing: credit cards, finance for capital items like cars, and payday loans. Most of this debt is not to buy luxuries but simply to make ends meet since so many people live paycheck to paycheck.

The implications for SMEs of a potential change in consumer spending habits

Clearly the retail sector is the first to feel the effects of changes in consumer spending and arguably the shift to online purchases has not only been because of the convenience but also because buying goods online can often be less expensive.
Equally the rise of the budget food stores, such as Aldi and Lidl, suggest a shift in food shopping habits to make household incomes stretch further.
There may also be signs of a shift in the travel and tourism sector based on fewer people taking holidays abroad and instead having “staycation”. This is something I shall be exploring in a focus on the sector later this month although there may be other factors at play here as well.
Clearly, though, the pressures outlined in this blog on household incomes would suggest that unless things change to improve our national economic prospects there may be a longer-term shift in consumer spending habits.
Those businesses that rely on consumption should not assume this is a temporary blip.
Given the changing circumstances it will be essential for those of you in this sector to review and adjust your business models, your marketing plans and your products and services in order to safeguard your business for the future.
Stop press: it remains to be seen what effect today’s Bank of England Interest rate increase, from 0.5% to 0.75%, will have on consumer spending but it is likely to affect all those with variable or tracker rate mortgages making disposable household income even tighter.

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Business Development & Marketing Cash Flow & Forecasting Finance General

Insolvencies: business failures slowing but individual insolvencies climbing

individual insolvencies rise signalling storm clouds overheadI generally concentrate on the quarterly insolvency statistics for businesses since my blogs are designed to help SMEs.
However, there has been a worrying trend in the numbers of individual insolvencies and in the latest quarter’s figures, from April to June 2018, released by the Insolvency Service they had reached their highest level since the first quarter of 2012.
This could have implications for businesses, especially those that depend heavily on consumer spending.
Company insolvencies for Q2 2018
While company insolvencies are still higher than they were in the same quarter in 2017 decreases in compulsory liquidations, administrations and underlying creditors’ voluntary liquidations meant that the underlying numbers of insolvencies had decreased.
Total company insolvencies for April to June decreased by 12.4% compared to the first quarter of 2018 while the underlying number of insolvencies decreased by 2.0%. However, insolvencies were still 12% higher than for the same quarter in 2017.
The construction industry and the wholesale and retail trades still top the list of failing companies as has been the trend for some months.
During the first half of 2018 there were 196 CVAs which is hardly any increase on the 171 CVAs in the same period of 2017. I suspect a large proportion of these were accounted for by retail businesses looking to reduce their rent as evidenced by the high-profile examples we have been reading about in the press.
Individual insolvencies for Q2 2018
The numbers for individuals getting into financial difficulties are noteworthy, because they have been steadily increasing since 2015 and sooner or later are likely to impact on SMEs as mentioned above.
IVAs (Individual Voluntary Arrangements) reached a record high between April and June and individual insolvencies increased by 4.4% in this quarter when compared with January to March 2018.
It may be that a combination of factors is at play here, in that prices have been rising since the EU referendum vote as the value of £Sterling against other currencies has plummeted, making imports more expensive, while wage growth has been slow and the proliferation of low-skill, low-wage employment or uncertain zero-hours contracts has put pressure on individual finances. Also access to credit is becoming more difficult as regulation has begun to restrict loans to those who cannot prove their ability to repay debt.
This month’s key Indicator will explore all this in more detail when the focus will be consumer spending and potential changes in spending and saving habits.
I hope it will provide useful insights for you as SMEs.
 

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Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Austerity fatigue, consumer behaviour and still choppy High Street waters

Tesco’s announcement of a halving of profits for the first half of the year suggests there is no clear sign that its turnaround plan is working.
It seems that any recovery in retail in general and the High Street in particular is still very uncertain.
While there is some evidence that consumers are spending a bit more, this is generally benefiting the “budget” retailers, such as Primark, Aldi and the near-ubiquitous variations on the Pound store theme, but not on larger items such as white goods or furniture.
As a small illustration of a fairly typical High Street, Ipswich has, in the last couple of months lost Gap and Next from its main shopping street, while Primark is in the process of expanding into the space left vacant. Also, with three High Street versions already on the Pound theme, a fourth has just been opened.
All this suggests that while consumers may be spending money, this may have more to do with austerity fatigue and the need for the occasional treat and there are still ongoing worries about job security, low interest rates and the economic future.
The one bright spot seems to be a growth in small niche and independent retailers who are benefitting from a shift to more frequent but lower value shopping by consumers.
The question, though, is whether such retailers can survive in the longer term, given the increasing pressure on their margins, prices and costs.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Inequality stifling growth?

With an election due soon and party conference season in the UK almost completed, it is no surprise that there has been some focus on the widening inequality between society’s poorest and richest.
However it seems it is not only on the politicians’ minds.
Income inequality is on the agenda for annual meetings of the IMF and the World Bank, and it has also been the subject of a discussion on BBC’s Radio 4 between economics editor Robert Peston and two US economists, Amir Sufi and Prof Atif Mian, whose book House of Debt explores the issues of widening inequality making us all poorer.
Why?  Because there is a theory developing that there is a link between the debts of the poorest in the economy and recession, which argues that because the poor have little or no spare disposable income and when there is a slump, and debts outweigh the value of property this group spends much less.
When millions do this, as consumers did following the 2008 Crash, the result is recession.
Could there also be a link between this and the anaemic wage growth that has hit most working people since then? And could this be an argument for boosting their spending power to stimulate economic growth, – either through wage increases at least in line with inflation or by reducing taxation?
Of course SME employers will argue that wage increases are unaffordable given global competition and narrowing margins – so what can be done to break the deadlock?
My own view is that we need to stimulate investment in productivity so that in turn employers can share the gains. What’s yours?

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Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Unbalanced recovery – surprise, surprise

 

Over the past few weeks there have been a number of profit warnings from high profile companies, including Serco, Pearson, RBS, Debenhams and Morrisons, mainly based on their sales in the last quarter of 2013.

Subsequently the Governor of the Bank of England, Mark Carney, said that the so-called economic recovery was “neither balanced nor sustainable”.

Then last week Chancellor George Osborne, speaking to business leaders in Hong Kong, referred to the economy as being “not secure” and “unbalanced”.

Prior to these developments the overall message coming from Government was far more positive with unemployment falling faster than expected and predictions that the economic recovery would consolidate throughout 2014.

There had been plenty of voices warning that the recovery was far too dependent on consumer-led spending and the property market but they went unheeded.

What has changed?

Now it seems the ONS figures due to be released next week are expected to reinforce this latest message of an unbalanced and fragile recovery too reliant on consumer spending.

Could it be that we are being prepared for an unpalatable budget which the Chancellor is due to deliver in three weeks’ time? 

The message for SMEs remains that caution is warranted, close attention to cash flow is still in order and ever greater efforts to grow are needed.

As an SME owner are you more confident than you were a year ago  – or less?

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Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Will we see more retail failures in the New Year?

 

With a quarter day looming in December many retailers will be hoping for healthy sales in the run-up to Christmas in order to pay their rent.

We are led to believe that an economic recovery is consolidating and that 2014 will continue the upward trajectory, but on the High Street the picture is not so clear.

There is already some evidence that the pre-Christmas rush has been delayed with consumers waiting for last-minute reductions. Figures from the accountant BDO showed that High street sales fell in the first week of December by 4.1% in non-food sales to December 8, while online shopping rose by 25%.

Fashion stores seem to have suffered worst with sales in the first week of December down by 5.9% and H & M already launching a winter sale offering reductions of up to 60%.

Whether High Street shopping picks up in the next few days remains to be seen, but there is a likelihood that with wages lagging behind the cost of living and significant energy cost increases the much vaunted consumer-led recovery may not be as lively as hoped.

Complicating the picture is the growth of the “buy local” movement, which may encourage more shoppers to patronise their small, local independent stores for both food and non-food items, especially unusual gifts.

Looks like it might be an interesting start to the New Year.

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Is it wise to rely so heavily on a recovery led by consumer spending?

There has been some recent data and a good deal of spin about the economic recovery becoming more secure and that it is time for businesses to start investing for growth.
While unemployment may be steadily decreasing, the housing market picking up and consumer spending rising a little it would, in our view, be wise to be cautious, not least because the Government seems to be relying a little too heavily on a consumer and SME-led recovery.
Firstly, there has been evidence that the jobs being “created” are part time and low-paid and that in any case wage increases are lagging far behind the rising cost of living. 
Secondly, on the evidence so far, households will be facing hefty utility and energy price rises in the region of 10% by the end of the year, despite Thames Water’s attempt to increase water rates next by 8% being rejected by the watchdog. 
Thirdly, there is also some evidence that increased consumer spending is yet again being financed by credit cards and personal debt, which has been rising steadily since mid-2012. 
Fourthly, there are still plenty of voices arguing that the ‘Help to Buy’ scheme is merely pushing up house prices and borrowing to “bubble” levels – a point reinforced by property website Rightmove, which revealed a 10% rise in property price in London in October and of an average 2.8% in asking prices in most parts of England. 
It would appear that measures to stimulate the economy are working, but can we be certain these are not a pre-election gimmick that conceals the truth? 
Regardless of short term statistics, consumer spending will continue to struggle while personal and SME levels of debt are so high and households continue to worry about making ends meet. In such a market SMEs as well as consumers might be wise to wait until after the election to confirm growth is sustainable before making big investments.
 In the meantime they would be well advised to continue paying close attention to cash flow, paying down any expensive debt or hoarding cash and if necessary restructuring to be as lean and fit as possible ready for the moment when the fat lady really does start singing, IF she does. What do others think?
 

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Businesses Should Prepare Themselves for the High Level of Inflation

One of the greatest worries in the predicted difficult conditions of 2011 for both businesses and consumers is price inflation thanks in part to the increase in VAT from 17.5% to 20% from January 4 but also to the rise in commodity prices including basic foods and oil. 
Coupled with rising energy prices and public sector job cuts, this is expected to lead to a drop in consumer spending on non-essentials.
Businesses therefore need to protect themselves to ensure their survival and consider whether to concentrate on profits in the short term rather than longer term growth.
A high inflation rate makes it difficult for businesses to set prices. Normally when the inflation rate is climbing too quickly or remaining consistently high, interest rates will be increased in an attempt to bring it under control and eventually reduce it.
However, in an interconnected global economy, where most countries are subject to the same external pressures from such things as commodity price speculation on basic foods, speculation on futures in oil and minerals that are the raw materials used by manufacturers, it is being argued that this will not work now.
Financial engineering is being carried out well outside the influence of the government and beyond any attempts by the Bank of England to use interest rates to bring inflation down.  The question is whether in fact inflation is something to be worried about in current circumstances.
A UK business trading only in the UK will face a tougher time than a UK business focused on export, which can target the emerging BRICs with expanding middle classes that provide capacity for economic growth.
UK focused businesses in 2011 are therefore likely to be caught between a rock and a hard place and it may be that businesses should consider carrying out a thorough review to identify any cost savings they could make before the going gets any tougher.